It goes without saying that the associate salary wars are over. Firms have responded to a drop in business and a glut of talent with salary freezes, salary cuts or even a wholesale revamping of their pay scales. But the retrenching effort so far hasn't affected first-years nearly so much as it has mid-level associates, according to The Recorder's annual temperature-taking of associate salaries.
Two firms stopped paying existing first years $160,000 earlier this year: Manatt, Phelps & Phillips, which is now paying them $144,000; and DLA Piper, which announced it has returned to $145,000 as part of 10 percent salary cuts for associates across the board. (Manatt Phelps declined to comment on the salary we report in this story.)
Two others are set to pay their newly arriving first years less: Howrey is paying $125,000 under its new apprenticeship model, and Sheppard Mullin Richter & Hampton, has announced internally that its incoming first-years, who are joining between September and February, will be paid $145,000.
But more divergence is evident among third- and fifth-year salaries. Just a year ago, lockstep pay made one firm look just like the next , with a single market rate for each associate class. This year, several firms are paying the old, high standard: Third-years get $185,000, and fifth-years $230,000. But at many others, third-years now get $170,000 and fifth-years earn $210,000 -- in many cases, the result of salary freezes, which have left many associates earning the same amount this year (and perhaps in 2010) as in 2008.
Some industry experts predict the market will blur further as more firms shift from lockstep models to merit-based compensation. At the same time, industry experts expect more firms to pare first-year pay back to $145,000.
Morrison & Foerster is among the firms that have so far stuck to $160,000, even as it freezes salaries for other classes. Chairman Keith Wetmore said it's no surprise that many firms have not cut the salaries of existing first years, saying that would be demoralizing.
But he's in no rush to announce base salaries for class of 2009 first-years, and describes that as a market-driven decision. "Ultimately, firms end up aligned, so there's not much reason to announce early."
Sheppard Mullin partner Robert Williams said his firm waited a long time for a market consensus to develop. "But it hasn't happened," Williams said. Williams, the head of firmwide recruiting, traveled last month to all Sheppard offices to announce that incoming first-years would be paid $145,000, down from $160,000. The reduction is partly a response to pressures from clients for lower rates, Williams said, and will be accompanied by a cut of about $15 per hour in first-year billable hour rates for many clients. Billable-hour targets will be unchanged.
Williams said the firm froze salaries for 2009, creating two classes at $160,000. To free up that bottleneck, Sheppard Mullin will unfreeze salaries in January to allow each class to move up a notch. Second-years will stay at $160,000 while third-years move up to $170,000. "I think it would be very harsh to keep a person at the same salary for three consecutive years," he said. "That's not to say we don't feel the effects of the recession, but it is not devastating to us, and we value our associates."
Williams is pretty sure the market for first years will end up at $145,000. "If our approach turns out to be out of step with the other firms, we'll have to change," he added, "because we can't afford to lose out to other firms on the basis of salary."
Altman Weil consultant Ward Bowersays it makes sense that so many firms have left existing first-year associates at $160,000, because firms are saving in other ways, such as through layoffs, deferrals, frozen salaries and more limited hiring. "Law firms are hiring fewer associates," he said. "That's the key." Two years ago, firms across the country hired about 10,000 fresh graduates, he said. He predicts that in 2010, it will be two-thirds or half of that.
On the other hand, to say a firm was paying $160,000 used to mean a lot more. Lisa Smith, who heads Hildebrandt's law firm consulting practice, including associate management and finances, estimates that about one-third of large law firms are seriously looking at merit-based compensation models.
"You'll see far more variation going forward, so the starting salary becomes far less important and it becomes about how fast you can advance," Smith said.
She also expects that ultimately, there will be a bigger difference in base pay for incoming associates as well. "I don't think we'll see a single number, but a range of numbers based on what the firms feel is important," Smith said.
She added that it's unclear how long salaries will stay frozen. "I don't see this economic pressure changing dramatically. When you look at corporate America and law firm partners, all over the place people are taking pay cuts."
A handful of firms are advancing the case for merit-based pay. Howrey's already got a new system in place and Orrick has announced its intention to roll out a new compensation system in January, while Morgan Lewis told The Recorder that the specifics of its intended new model are still being worked out. More recently, Townsend and Townsend and Crew announced its plan to move toward performance-based pay beginning in 2011.
Making a change of such magnitude requires pretty long lead time. Hildebrandt's Smith said it can take up to 18 months to put something in motion. "Changing an overall career track for associates requires buy-in from partners, from associates and those who will be implementing it," she said.
Manatt partner Brad Seiling, who chairs his firm's associate committee, doesn't believe all firms will break from the pack. But it doesn't surprise him to see some differences already. "I think those differences will grow."
Seiling, who spoke generally about the market but declined to discuss Manatt's compensation, said he expects pay structures to reflect each firm's internal dynamics and economic realities. "The days of a 'uniform market' compensation structure for associates -- I think we're moving away from that."
